AN

DIGITAL TRANSACTION TAX

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  • BEPS

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  • Action 1: Addressing the tax challenges of the digital economy

    • Modify the existing Permanent Establishment (PE) rules to recognize significant digital presence in other countries.

    • Definition of virtual fixed place of business PE based on a company's online activities through its website hosted out of another jurisdiction.

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  • Taxation Provisions

    • Imposition of final withholding tax on payments for digital goods/services from foreign e-commerce providers.

    • Equalisation levy on transactions involving non-residents conducting digital business in India.

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  • Equalization Levy 1: Finance Act 2016 (Section 165)

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  • Indian Taxation Amendments

    • Introduction of Chapter VIII titled "Equalisation Levy" in the Finance Act, 2016.

    • 6% levy on services received by a non-resident without a PE in India, from a resident or non-resident with a PE in India.

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  • Basis of Charge

    • Applicable when non-residents provide:

      • Online advertisement

      • Digital advertising space or services

    • Charge: 6% on consideration.

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  • Exclusions from Equalisation Levy:

    • Non-resident service provider with a PE in India for specified services.

    • Business-to-Consumer (B2C) transactions.

    • Small players with transactions below INR 1,00,000.

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  • Collection and Recovery:

    • The payer must deduct and deposit the Equalisation Levy.

    • Service provider is not held liable for the payment.

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  • Finance Act, 2018: Introduction of Significant Economic Presence (SEP).

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  • Definition of Significant Economic Presence (SEP):

    • Transactions of goods/services by non-residents in India with aggregate payments exceeding a specified amount.

    • Systematic solicitation of business through digital means in India.

    • “Activities constitute SEP regardless of where agreements are made or business presence.”

    • SEP implementation was deferred to April 2021.

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  • Equalization Levy 2: 2020 (Sec. 165 A)

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  • Overview of Equalization Levy 2020:

    • Basic charge: 2% on consideration for services provided by non-resident e-commerce operators.

    • Charged on e-commerce supply/services.

    • Collection: To be paid quarterly by e-commerce operators.

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  • Basic Charge Summary:

    • 2% Equalisation Levy on non-resident e-commerce operators.

    • Applicable on e-commerce supply or services.

    • Payments due quarterly; recovery possible from the payer in case of default.

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  • Details on Equalization Levy:

    • 2% on consideration for e-commerce services targeting Indian residents or IP addresses.

    • Includes sales of advertisements or data from India.

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  • Definition of E-commerce Operator:

    • A non-resident managing an online platform for sales or services.

    • "Online" refers to services accessed via the internet or digital means.

    • "E-commerce supply/services" covers a range of online transactions and activities.

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  • Exclusions from E-commerce Levy:

    • If e-commerce operator has a PE in India, effective connection exempts it from levy.

    • For operators with gross receipts below INR 2 Cr.

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  • Case Study I: B2C Transaction:

    • X Co. sells laptops online to Indian customers, with invoicing and payment conducted online.

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  • Case Study II: B2B Transaction:

    • F Co. sells laptops to I Co. in India, online contract negotiation and payment.

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  • Case Study III: B2B Offline Contract:

    • X Co. and Y Co. agree offline for laptop sales, invoicing done online.

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  • Case Study: Provisions of Services I:

    • U Co. provides IT services online to I Co. under an offline contract.

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  • Case Study: Provisions of Services II:

    • U Co. manages hotel bookings online with service delivery offline.

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  • Facilitator (Marketplace Model) Case Study I:

    • X Co. sells UK Co.'s laptops, raising questions about EL liability and payment responsibility.

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  • Facilitator (Marketplace Model) Case Study II:

    • X Co. lists UK Co. hotels. Questions arise about EL applicability and payment calculations.

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  • EL, Royalty & FTS Interplay:

    • Explores conditions under which EL vs. income tax applies.

    • Exemption implications for FY 2020-21 and beyond.

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  • Compatibility with International Law:

    • Reconciling Indian law with international agreements, focusing on Article 245.

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  • Most Favoured Nation (MFN) Treatment:

    • Examination of if Chapter VIII treats countries equitably under trade agreements.

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  • National Treatment Issues:

    • Assessing if Equalisation Levy disproportionately affects non-resident suppliers.

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  • Discriminatory Definition Issues:

    • Implications of defining e-commerce operators in a way that affects non-residents adversely.

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  • Arbitrariness in Procedures:

    • Discusses the lack of a proper assessment mechanism under Chapter VIII.

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  • Challenges for E-commerce Operators:

    • Non-residents face burdens in determining resident status of purchasers under Indian law.

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  • Order Imposition Challenges:

    • Examines the implications of the absence of a distinct order for imposing the Equalisation Levy.

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  • Legal Considerations for Declarations:

    • Issues arising when customer declarations regarding residency are incorrect.

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  • Impact of Incomplete Revenue Law:

    • Argument that absence of proper mechanisms could violate constitutional provisions.

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  • Extra-Territoriality Concerns:

    • Investigates the legitimacy of imposing levies on purely foreign transactions.

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  • Example 1:

    • Resident Indian buying pizza online in the UK raises issues about the applicability of the Equalisation Levy.

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  • Example 2:

    • Indian customer searching for products in a UK search engine highlights potential Equalisation Levy implications.

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  • OECD PILLAR -1:

    • Reference to global tax initiatives addressing digital economy challenges.